Levy on emissions from international shipping

Legal assistance paper

All reasonable efforts have been made to ensure the accuracy of this information at the time the advice was produced (please refer to the date produced below). However, the materials have been prepared for informational purposes only and may have been superseded by more recent developments. They do not constitute formal legal advice or create a lawyer-client relationship. You should seek legal advice to take account of your own interests. To the extent permitted any liability is excluded. Those consulting the database may wish to contact LRI for clarifications and an updated analysis.

Date produced: 11/08/2011

1. Is the USA’s claim that a proposed global scheme to levy emissions from international shipping by the IMO would be illegal correct? What is their legal basis for making this claim?

2. Is there a clear legal precedent for centralized collection of revenues from an international tax, or a maritime tax? Is there precedent for these sums to be channeled to other countries?

3. The International Oil Pollution Control (IOPC) Fund, under which the IMO collects ‘contributions’, has been cited as a precedent for such a scheme. Is this a credible legal precedent?

4. What is the relevant international law? Does the UN convention on the Law of the Sea apply? If so, does it include language that can provide for centralized collection of revenue? Are there other international treaties that would apply (either within the shipping sector or which more broadly address trade)?

5. Can the the collection of levies by the World Intellectual Property Organization (WIPO) serve as a legal precedent for the proposed international maritime carbon tax scheme?

Summary: Although it is likely that the USA can legally authorize an international organization to collect revenues outside of its normal (and annual) budget process, it almost certainly cannot do so without explicit legislative authorisation of some kind. Any attempt to apply an international tax regime to the USA without legislative action—even through a new treaty—would very likely be held to be unconstitutional by USA courts. The IOPC is arguably the closest precedent for the centralised collection of revenues from an international tax. However, it cannot be used as a straight forward precedent as it possesses a number of distinct characteristics to the proposed scheme. Further, it cannot be apply as a direct precedent for the USA, as the USA is not a member of the IOPC. An international maritime carbon tax would require new treaty authorisation, as no existing international legal instruments directly apply.

1. There is no definitive answer on whether the USA claim is correct. The USA has never entered into an international agreement truly analogous to the proposed plan, and so the constitutionality of such an agreement has never been put to the test. Although it is likely that the USA Congress could authorize an international organization to conduct a levy on USA maritime traffic, an international agreement could not authorize such a levy on USA traffic without direct legislative authorization.

The main point of concern is the “nondelegation doctrine”. The doctrine is drawn primarily from Article I Section 1 of the USA Constitution (“All legislative Powers herein granted shall be vested in a Congress of the United State”). Article I Section 7 may also prove relevant (“All Bills for raising Revenue shall originate in the House of Representative”). Section 1 has been read consistently to limit the ability of Congress to delegate its vested legislative power to outside bodies. The nondelegation doctrine most frequently arises in the context of delegations to domestic agencies within the executive branch, and in that context is a very weak limitation on congressional power. So long as Congress provides an “intelligible principle” for the exercise of legislative power by an agent, the delegation is deemed to be constitutional.

However, the nondelegation doctrine may present a more significant limitation in the international context. As a theoretical matter, the USA Congress has far stronger controls, budgetary and otherwise, over a domestic agency than over an international organization such as the International Maritime Organization (IMO). The degree to which the nondelegation doctrine could, or should, be extended to the international sphere is an area of legal murkiness and has been the subject of extensive academic discussion.

Purely as a historical matter, the USA government has repeatedly delegated some degree of constitutional authority to international bodies. The 1794 Jay Treaty with Britain set up a binding international claims tribunal, and the decisions of numerous treaty-created arbitration bodies have been given binding effect in USA courts ever since. More recently, the North American Free Trade Agreement (NAFTA) has given an international body domestic legal authority to overturn USA regulations that are inconsistent with the obligations under the treaty. Likewise, the Chemical Weapons Convention delegates inspections of USA weapons stocks within USA borders to an international body. This delegation of domestic regulatory authority has, thus far, faced mostly academic criticism and, importantly, no serious legal challenge.

Notably, however, none of these international delegations conferred the power to raise revenue. Article I Section 7 of the USA Constitution imposes an additional limitation on who may tax, above and beyond the general rule that Congress alone can legislate. But, at least in the domestic nondelegation context, the USA Supreme Court has explicitly stated that revenue delegations should be treated no differently from other legislative delegations. It seems likely that if Congress passed a bill delegating an aspect of the taxing power to an international body, it would be treated as a standard delegation, approved so long as it is clear and “intelligible.”

Note however that many past delegations to international organizations have taken the form of a self-executing treaty rather than legislation. The Constitution almost certainly forbids raising revenue through a treaty. Only the House of Representatives has the constitutional authority to raise revenue, while the treaty process involves Presidential action with Senate approval and does not implicate the House at all (though there are certain international agreements that may be approved by the House and the Senate). Surely the Senate and the President cannot delegate the House’s taxing powers without its involvement. Admittedly, Section 7 only gives the House the exclusive power to introduce “Bills for raising Revenue,” but the argument that a revenue-raising treaty is not a “Bill” seems weak. The short answer is that while the USA can likely legally authorize an international organization to collect revenues outside of the normal (and annual) budget process, it almost certainly cannot do so without explicit legislative authorization of some kind.

2. The closest to a clear precedent for centralized collection of revenues from an international tax is the IOPC Fund (which does not systematically channel money to other countries). The clear precedent for an international tax which redistributes funds among countries is the European Union (which does not have centralized collection of revenues). The USA does not participate in either of these schemes, so there is no clear USA precedent for either element.

For more information about the IOPC Fund, see Question 3 below.

The European Union system features comprehensive international taxation, substantial portions of which are redistributed among member states after collection through a variety of programs. The EU, in order to avoid dependence on the largesse of its constituent states, has a system of “own resources.” The EU is assigned revenue from customs duties, certain agricultural levies, a percentage of Value Added Tax (VAT) proceeds, and a percentage of Gross National Income. However these funds are not collected by the EU, but by the member governments. The EU does retain the right to “examine at regular intervals the national provisions communicated to it by the Member States [and] transmit to the Member States the adjustments it deems necessary in order to ensure that they comply with Community rules and report to the budgetary authority.” It is unclear whether such supervision of national laws is viable for a less comprehensive international organization. As the USA is not a member of the EC, again there is no legal precedent on point.

Perhaps the closest analogy to the present proposal that did feature USA participation was a short-term levy attached to the clearance of the Suez Canal in 1956-1957. Following the war in Egypt in 1956, the Suez Canal was obstructed. The United Nations spent US$7 million clearing the area. Initially, this money was lent by member nations (almost half by the USA). The UN General Assembly resolved to repay the loans by imposing a temporary levy on commerce through the canal, delegating collection to a private company.

Unfortunately, the Suez Canal incident offers very weak legal precedent. The UNGA had no power to authorize a tax on canal traffic, and indeed most shippers initially refused to pay what was, in purely legal terms, a voluntary fee. The shipping companies only consented to paying the fee once governments allowed them to raise rates, and indeed the full value of the loans was never paid off. The Suez Canal example, due to its distant and voluntary nature, does not create legal precedent, but at least it shows USA willingness at one time to participate in an international levy collected by a centralized non-US party.

The idea of international taxes as a funding mechanism for the UN and other international organizations is recurrent, but with the above exceptions has not come to pass. Apart from potential legal barriers, countries have been unwilling to yield control over revenue streams as a political matter.

3. As discussed above, the IOPC Fund is a precedent for a maritime tax scheme in general. The IOPC funds centrally collect revenue from oil transporters for disbursement in the case of oil spills. There are three IOPC funds, one founded by treaty in 1971 (no longer receiving contributions), one by treaty 1992, and a Supplemental Fund founded under a 2003 protocol. The funds are financially distinct, with differing membership and scope of authority (the latter funds have higher liability caps), but they all use the same financial structure.

States join the IOPC funds, but the actual contributions to each fund are taken by the fund directly from all entities within the member states that annually receive more than 150,000 tons of qualifying oil. These companies are required to report their receipt of oil directly to the appropriate IOPC body. The willingness of countries to replicate this financial model recently, more than thirty years after the creation of the first IOPC fund, illustrates that the system functions reasonably well.

However, there are also some key differences between the proposed scheme and the IOPC:

  • The IOPC was established by an IMO treaty. The IMO did not decide to levy contributions directly but adopted a treaty establishing an organization to do so. The IOPC Fund Convention provides that parties to it can decide on the system of collecting levies, i.e. state parties can decide the way in which contributors (receivers of crude heavy in their countries) pay the levy in accordance with their domestic legal systems. States can decide to collect the money themselves and then pass it to the IOPC Fund, or states can allow receivers of heavy crude oil to arrange payment directly with the Fund.
  • The IOPC was established to manage claims for oil pollution damage, which can be precisely quantified. There is no notion of ecological damage. The IPOC Fund pays what it costs to restore beaches to the state they were before a spill, or to compensate, hoteliers and fishermen for the lost of revenue.
  • The IPOC Fund does not distinguish between developed and developing countries. It is an international fund providing for compensation in excess of compensation provided by shipowners by operation of the Civil Liability Convention. The Fund is therefore not an organization aimed at levying from developed countries to help the developing ones. It is rather an organization operating in accordance with a commercial insurance scheme regulated by treaty law.
  • Finally, the IOPC Fund is in no way a legal precedent for the legality of a maritime tax scheme under USA law, because the USA is not a member of the IOPC Fund. Interestingly, there is no evidence that the USA decided not to participate in the IPOC Fund due to nondelegation doctrine concerns. Rather, the USA decision not to participate in the IOPC system has been justified as a purely substantive matter, owing principally to the lower liability cap of the international system as opposed to USA law under the Oil Pollution Act and related laws. While the absence of the nondelegation argument by diplomats in the 1960s bears no resemblance to legally binding precedent, it does demonstrate that the USA government’s current objection to an international maritime levy is not based on obvious precedent.

For the above reasons, it is doubtful whether the IPOC Fund would work as a credible precedent for an international maritime carbon levy.

4. While there are numerous international legal instruments relevant to maritime commerce, none are of direct relevance to a carbon levy on bunker fuels. A maritime carbon tax would require new treaty authorization. Nothing in UNCLOS confers powers on any body relevant to a carbon tax regime, and the USA never ratified the treaty. Even if UNCLOS could be read to authorise a carbon tax, the USA is only bound by the elements of UNCLOS that qualify as customary international law. There is emphatically no customary international law authorising the (almost unprecedented) collection of tax revenue by an international body.

The Kyoto Protocol does commit state parties to reducing their greenhouse gas emissions from international maritime activities “working through” the IMO. This at least suggests that the IMO is the preferred venue under international law for addressing marine emissions, and may require Kyoto signatories to pursue some sort of climate agreement under IMO auspices. The USA has not ratified Kyoto, and there are no comparably direct assignments of maritime emissions responsibility in the UNFCCC.

The USA may argue that it is not within the mandate of the IMO to “collect levies”. This is a valid point. The IMO has never collected a levy directly, and the collection of “levies” or “taxes” is normally a matter within national law. But this does not mean that member states of the IMO cannot meet and decide whether the IMO’s mandate, as it now stands, can be interpreted in a way that it can allow some form of collection, or whether the mandate could be amended for this purpose, or whether another organization could be created to do so.

The founding convention for the IMO includes some vague language that could be twisted to authorize IMO bodies to impose and collect a tax. The convention articulates as one purpose of the IMO “[t]o provide machinery for co-operation among Governments in the field of governmental regulation and practices relating to technical matters of all kinds affecting shipping engaged in international trade.” A centralised taxing system is certainly “machinery for co-operation…in the field of governmental regulation,” although interpreting the actual creation of a taxing infrastructure as a “technical matter” is a stretch. Article 38 concerning the IMO’s Marine Environment Protection Committee authorizes the Committee to “erform such functions as are or may be conferred upon the Organization by or under international conventions for the prevention and control of marine pollution from ships” and to “Consider appropriate measures to facilitate the enforcement” of such conventions. Moreover, the Environment Committee may “[c]onsider and take appropriate action with respect to any other matters falling within the scope of the Organization which would contribute to the prevention and control of marine pollution from ships.”

Under the broadest reading, the 1948 Convention would authorize all marine-pollution-relevant “appropriate actions” that fall within a scope including cooperation over all technical measures. But if the IMO did attempt to use its existing authority to impose a levy on USA trade, the Convention would definitely fall as a matter of USA law under the nondelegation doctrine. Not only are there real constitutional issues with raising revenue via treaty, but any reading of the IMO Convention that would permit the creation of a taxing regime would also mean the 1948 treaty is a delegation of legislative authority utterly lacking in “intelligible principle[s].” Thus, a maritime carbon tax would be advised to follow the example of the IOPC Funds and derive authority from a separate and specific legal instrument.
In summary, the precedents for a centrally collected maritime carbon tax are limited on an international scale and have not included USA participation. Therefore the legality of such a proposal under USA law is ambiguous, although the historical treatment of international delegations suggests that Congress could act to allow an international body to collect a tax. As suggested above, although members of the IMO might decide that an international maritime carbon levy is within the IMO’s current mandate, it is likely that such a levy would require new treaty authorization. However, any attempt to apply an international tax regime to the USA without legislative action—even through a new treaty—would very likely be held to be unconstitutional by USA courts.

5. The World Intellectual Property Organization (WIPO) is a specialized agency of the United Nations. WIPO was established by the WIPO convention in 1967 with a mandate from its member states to promote the protection of intellectual property through cooperation among states and in collaboration with other international organizations. WIPO’s legal authority is exercised through a series of treaties which govern various aspects of intellectual property copyrighting. The treaties and their members are referred to as “Unions.” There are currently 184 member states to the various treaties with different countries participating in different unions with some overlap.

A number of treaties deal with international registration of intellectual trademarks. An example is the Madrid Protocol which is an international trademark treaty that makes it easier, faster and less expensive for trademark owners to file and register trademarks in up to 57 other countries that are currently members of this protocol (the United States is also a party). Rather than filing separate trademark applications in each individual country, the Madrid Protocol allows an applicant to file one International Application (IA) with a single trademark office, in one language, in one currency and with one set of fees. This international registration system, like others, is governed by the International Bureau of WIPO based in Geneva, Switzerland.

WIPO is unusual among UN organizations in that it is largely self-financing. Under Article 11 of the WIPO Convention, the Organization created two separate budgets; the budget of expenses common to the various Unions, and the budget of the Conference itself. The budget of expenses common to the Unions includes provisions for expenses of interest under the various individual Union treaties and is financed from a number of sources. They include contributions of the Unions (the amount of contribution is fixed by the Assembly of that Union with regard to the Union’s interest in the common expenses); charges for services performed by the International Bureau (established through fixed fee schedules under the various treaties); sales of, or royalties on, the publications of the International Bureau; gifts and bequests given to the Organization and; rents, interests and other miscellaneous income. The budget of the Conference itself includes provisions for the expenses of holding sessions of the Conference and the cost of the legal-technical assistance program. This budget is financed from the following sources: contributions of states which are party to the larger Convention but not members of any of the Unions; sums made available to this budget by the Unions (amounts fixed by the Assembly of that Union with each Union free to abstain from contributing to this budget); sums received for services rendered by the International Bureau in the field of legal-technical assistance; and gifts, bequests and subventions given for this purpose.

In practice, for the 2010-2011 biennium, about 90 percent of the Organization’s budgeted expenditure of 618,8 million Swiss francs will come from earnings from the services which WIPO provides to users of the international intellectual property registration systems. These include among other things, filing fees under the Patent Cooperation Treaty (PCT), the Madrid system, and the Hague System. The remaining 10 percent will be made up mainly of revenue from WIPO’s arbitration and mediation services and sales of publications, plus contributions from Member States. These contributions are relatively small. The five largest contributing countries each donate about one-half percent of the Organization’s budget.

As discussed above, the WIPO levy structure is a credible precedent for a largely self-financing international association. Yet, applying this structure to the proposed maritime tax scheme is not a clean fit. Whereas the maritime tax would be based on a charge or levy on shipping emissions, linking the levy to an external carbon price, WIPO generates revenues mostly by providing services. Owners of intellectual property willingly pay registration fees to the WIPO because they receive global IP protection in return.